Avoiding Disastrous Mistakes on the IRA Beneficiary Form

Avoiding Disastrous Mistakes on the IRA Beneficiary Form

| March 10, 2023

IRAs are tax deferred retirement plans that should come with a warning label: “Caution, handle with extreme care” – because certain missteps can cause the whole thing to go through probate and trigger unnecessary taxes and fees.

The estate planning document for an IRA is called a beneficiary form. This form trumps all of your other estate planning documents.

This means the IRA passes according to the beneficiary form, not your will or your trust. It’s very important that this form is filled out properly, and you should be able to locate it on short notice.

Let me ask you a question: Can you go home right now, and find ALL of your beneficiary forms for ALL of your IRAs? For most people, the answer is NO.

You can find all your legal documents which cost you a lot of money to create, like your will, trust, and other estate planning documents. But this free IRA beneficiary form, which doesn’t cost a dime to fill out can’t be located by most people, even though their IRA is often their largest asset.

Don’t assume things, like “Oh the financial institution will have an updated copy.” There’s a good chance they won’t. Think of all the mergers in the last 10 or 20 years with companies.

Think about all the brokerage firms and banks that have merged. Remember when Morgan Stanley merged with Smith Barney? Remember when Bank of America absorbed Merrill Lynch?

Often when two financial institutions merge, moving the beneficiary information over to the new firm is not a top priority. We have seen a number of cases where after mergers, the beneficiary forms were lost or left blank.

The IRA passes outside your will and trust and is paid out to the beneficiaries named on this document. If the beneficiary designations are blank, or if the beneficiary has passed and there are no secondary beneficiaries indicated, then it’s paid to your estate. Meaning, it’s going to go thru the probate courts.

This causes two major disadvantages. First, the IRA will end up going through probate which can trigger unnecessary probate fees as high as 6%. For example, if you had a $300,000 IRA, this could cost the wife or kids $18,000 just because you don’t have a name on the form.

Besides the costs, it’s a time-consuming process that can last on average 9 months to a year and half, and also, it’s all public information which means people can search and see how much your heirs received. You want to avoid that!

The second disadvantage is the beneficiary will lose the opportunity to do the stretch IRA, which guarantees them, in most cases now, to have up to 10 years to take those taxable distributions as they please instead of likely having to take it out at over 5 years and potentially paying much higher taxes in one year.

I can’t stress enough, make sure you have named beneficiaries on your beneficiary forms and keep copies! This is so easy to do while you’re alive! Don’t let your heirs be shocked at finding no beneficiary forms or blank forms on your IRAs. Remember, it’s easier to avoid a mistake than it is to fix one!

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer, tax or financial professional. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.